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What is cost accounting system?
Cost Accounting Systems are the methods and techniques that have being used by for tracking resources concerning the creation and delivery of the services and products to the consumers The employees are using these methods in order to manage the resources successfully as well as evaluating their performance. They are used also for external reporting requirements such as balance sheet and income statement.
With other words they are designed to accommodate the specific needs of individual companies. The main Cost Accounting Systems are:
Job Order Costing - cost system that is used to accumulate costs by jobs or with other words batches. Job-order costing means the multi production of individual center working on variety of products rather than just one during a typical time period. There are two categories of factory cost under this method: prime and factory costs
Process Costing is a type of costing system that is used for production of small,
identical, low-cost items. Process costing averages the costs cannot be directly traced to each unit of product.
Activity-based costing (ABC) its purpose is to assign costs to activities. Activity-based costing is a process where costs are assigned due to the cause and effect relationship between costs and the activities that drive costs.
2.What are the major objectives of a cost accounting system in a hospitality establishment?
The main objectives of a cost accounting system are: the ability for measuring various departments' needs such as F&B and Front Office as well as the revenues they generate. In order to control these, the hotel must use the system. Every department of the hotel is being controlled and all the related information is then used in order to evaluate the costs and make any proper adjustments.
3.What are the major objectives of a cost accounting system in a manufacturing company?
There are two important management objectives: to provide managers with useful information for planning and cost control functions and to determine unit manufacturing costs. A manufacturing company usually uses a completed job cost sheet which contains a Cost Summary and Unit Costs. This includes the total and unit costs of the following:
Direct materials is the raw material used in production whose costs are directly traceable to the products manufactured
Direct labour is wages and other payroll costs of employees whose efforts are directly traceable to the products they manufactured
Manufacturing overhead is a catch all classification, which includes all manufacturing costs other than the costs of direct materials and direct labour.
4.What are the procedures in job order costing, process costing and activity based costing.
Job order costing process a specific set of events will usually occur with each job. Generally, the process is as follows: an order (or sales order) is received for the batch of products, a production order is issued from the sales order, materials and labour are ordered and tracked for the set of products, manufacturing overhead is allocated to the job using a predetermined rate (usually per labour hour or per machine hour). Actual manufacturing overhead will not affect the work-in-process account, instead it is charged to a control account. Direct labour and materials are charged by the accountant to the work-in-process accounts using the actual amounts incurred
Process costing procedures follow specific procedures, and while exact procedures may vary by company or by industry, they will generally follow these steps:
While other types of costing start with a sales order, a sales order is not needed for process costing as it is a continuous process
The work-in-process accounts are divided by department and are named as such - for example: Work-in-process - Department Name
The first department in the process makes the first entry into the work-in-process account, generally for the direct raw materials
As the products move from department to department, entries are made to each work-in-process department account
Direct labour costs are recorded by period
Actual overhead costs are recorded; no contra-account is needed because there is no over- or under-applied overhead due to the actual cost being applied
Indirect costs are applied to the overhead account in actual amounts
Activity based costing:
All activities that use resources are identified
Cost pools are set up for each of the activities identified
Overhead costs are assigned to the cost pools based on a cost driver
A cost driver is an activity that has a proven cause and effect relationship with the costs associated with the cost pool
Cost drivers can be based off of resources or activities
Only if a cost driver cannot be recognized will a cost be assigned on an a locative basis
Related cost pools are assigned an overhead rate based on cost drivers
Cost pools are used to assign costs; the basis depends on the company and industry
Costs can then be assigned to units, batches, or products
These pools can be combined to look at facility, division, or other levels of cost categories
Costs can then be evaluated to see where and how costs are occurring, from that point management can discern what costs are controllable and how they arise.
5.Which costing methods (job order costing, process costing and activity based costing) are best suited to the following business and why:
a) Old Home Bakery, Inc (a bakery that produces to order): Is actually an industry that sells items in batches that will be able to use job-order costing most effectively. It will use the job order costing, because it is destined to order rather than mass production.
b) Apache Oil and Gas Refinery: Process costing is proper when products are all the same Process costing is appropriate when products are homogeneous (or identical).
c) The Sea View Resort Hotel: It will use the job order costing, because it is better suited for the businesses that offer services.
d) Willie Wonker's Chocolate Factory: This Company will use the process costing which is a type of costing system that is used for uniform or homogeneous products. Process costing averages the costs over all units to come to the per unit cost. This is in contrast to other types of costing systems, such as job-order costing that is used for products that are in differentiated batches.
e) Harris and Harris Law Firm: This Company will use the job order costing. This method is used for production of large unique and high-cost items.
6.Explain and evaluate LIFO, FIFO and AVCO techniques
LIFO stands for last-in, first-out, meaning that the items that are purchased last are actually the ones recorded as first sold. LIFO valuation is permitted in the belief that an ongoing business does not realize an economic profit solely from inflation. When prices are increasing, they must replace inventory currently being sold with higher priced goods. LIFO is attractive to business in that it delays a major detrimental effect of inflation, namely higher taxes. However, in a very long run, both methods converge.
FIFO is a common method for recording the value of inventory. It is appropriate where there are many different batches of similar products. The method presumes that the next item to be shipped will be the oldest of that type in the warehouse. In an economy of rising prices (during inflation), it is common for beginning companies to use FIFO for reporting the value of merchandise to bolster their balance sheet. As the older and cheaper goods are sold, the newer and more expensive goods remain as assets on the company's books. Having the higher valued inventory and the lower cost of goods sold on the company's financial statements may increase the chances of getting a loan.
AVCO is a method of determining the value of an inventory by calculating unit cost that is the result obtained by dividing the total cost of goods available for sale by the number of units available for sale.